Vermont

Jeffrey B. Carr

Kerry G. Mayo

Economic & Policy Resources, Inc.400 Cornerstone Drive, Suite 310

P.O. Box 1660

Williston, VT 05495

(802) 878-0346

www.epreconomics.com

Vermont Situation

Against that U.S. economic background, the Vermont upturn continues this Spring…but rather meekly…–The housing market correction is now well underway with slowing price appreciation (now at a single-digit pace yr-over-yr.--OFHEO) and construction has slowed considerably (e.g. for 2nd homes)

–GSP growth has slowed to the +2.5% to +3.0% range,–Resort based real estate and amenity development continues but at a fraction of its prior pace,

–Jobs in the state’s Factory sector have gotten a positive push from the weakening U.S dollar, and IBM seems to be doing well…

–BUT the still relatively “high” level of energy prices and the poor first half Winter weather once again were “not helpful” to either the 1st Q of 2007 or the state’s Winter tourism season.

Vermont Situation

The positive push from lower energy prices has now dissipated...and prices are rising once again…

Tracking Vermont Energy Prices,January 2003-May 2007

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

2003:01

2003:06

2004:01

2004:06

2005:01

2005:06

2006:1

2006:6

2007:1

Year/Month

Pri

ce

(in

$)

#2 Heating Oil Regular Gasoline

Vermont Situation

The state’s labor market recovery-expansion continues, but the Spring 2006 re-benchmark was negative again…less than last year...but now 3 years in a row!

Job Growth Comparison, 2006--Pre- and Post-2007 Re-Benchmark Revisions

0.8% 0.8%

0.6%0.6%

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%

Total Jobs Private Sector Jobs

Perc

en

t C

han

ge

Total Jobs Private Sector Jobs

Vermont Situation

This underscores the restrained pace of the labor market expansion in the state…especially vs. last year Vermont's Year-Over-Year Job Change Rank By Selected NAICS Sector

March 2007 versus March 2006

Highest Ranked New England State

Rank in New England Rank in U.S.

Total-Private and Public Sector Jobs 26th (CT) 6th 45th

Total-Private Industries 22nd (RI) 6th 45th Construction 7th (RI) 5th 36th Manufacturing 12th (CT) 3rd 24th Trade, Transportation and Utilities 21st (NH) 3rd 41st Financial Activities 1st (RI) 5th 46th Professional & Business Services 11th (RI) 6th 43rd Education and Health Care 11th (NH) 4th 41st Leisure & Hospitality 19th (CT) 5th 44nd Government 15th (MA) 4th 36th

Source: U.S. Department of Labor

Prepared By: Economic & Policy Resources, Inc.

Vermont Situation

But the revisions did not alter the sector-by-sector view of the current labor market recovery-expansion...Measuring Vermont's Labor Market Recovery-Expansion by Selected NAICS Sector

Cyclical High

Cyclical Low

Through (Apr-07) # Jobs Lost

# of Jobs Recovered % Recovered

Total-Private and Public Sector Jobs 303.7 296.6 308.2 7.1 11.6 163.4%

Total-Private Industries 253.9 244.9 254.6 9.0 9.7 107.8% Construction 15.4 14.4 17.5 1.0 3.1 310.0% Manufacturing 47.3 36.6 35.7 10.7 -0.9 -8.4% Trade, Transportation and Utilities 59.3 57.9 59.5 1.4 1.6 114.3% Retail Trade 40.3 39.2 40.3 1.1 1.1 100.0% Financial Activities 13.2 13.1 13.3 0.1 0.2 200.0% Professional & Business Services 21.1 19.9 22.4 1.2 2.5 208.3% Education and Health Care 47.0 47.0 55.6 0.0 8.6 NM Health Care & Social Assistance 35.1 35.1 43.0 0.0 7.9 NM Private Education Services 12.2 11.8 12.6 0.4 0.8 200.0% Leisure & Hospitality 34.2 30.9 33.9 3.3 3.0 90.9%

Government 52.4 51.9 53.6 0.5 1.7 340.0%

Vermont Situation

The revisions also again appear to put job growth out-of-sync with other data...such as PI Withholding...

Comparing PI Withholding Receipts With Payroll Job Growth, October 2001-December 2006

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Oct-01

Jan-02

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

% C

hang

e (Y

ear

Ove

r Y

ear)

Payroll Job Change 12 MO MA PI Withholding

Vermont Outlook

The “consensus” forecast is that the state gets through the housing market correction and the increasing economic threats.– If so, the Vermont economic and labor market recovery-expansion will continue through calendar 2011…

– But at a noticeably restrained pace—slower than U.S., but on par with NE.

There will be plenty of opportunities for the economy to hit bumps—including falling into a full-fledged downturn—along the recovery-expansionary road. These include:–High and volatile energy prices (where small things have been magnified by how close to the edge we are),

–The still unfolding housing market correction—and the threat of it widening, –The potential for rising interest rates (Will the Fed over-react to the threat of inflation?), and

–Continued “sharp and ruthless” global competition—which a reflection of the realities today’s “new more competitive world” for business.

Conference Theme--Subprime

So far to this point, Vermont has been able to cope with the combined impacts of the housing market correction, rising affordability problems, and a higher than average level of subprime lending.– There is some discussion about varying data sources (Mortgage Bankers Association vs. Moody’s Economy.com-Equifax),

– Coverage differences—Moody’s E.com-Equifax seems more encompassing.

The key is Vermont has been able to avoid the potentially troubling combination of falling housing prices and rising foreclosures.– Housing prices are still rising, but at single digit rates.– Vermont’s foreclosure rate is among the lowest in the 50 states.

Conference Theme-Subprime

Nonprime Mortgage Originations as a Percent of Total Originations

National Median = 13.4%

New England Median = 19.6%

0 40 80 120

Miles

Percent 0.0% to 13.0%13.0% to 17.4%17.4% to 21.7%21.7% to 25.9%25.9% to 100.0%

2005

Nonprime Mortgage Originations as a Percentage of Total Origination Dollars

National Median = 13.2%New England Median = 19.2%

0 40 80 120

Miles

Percent0.0% to 14.0%14.0% to 17.3%17.3% to 21.4%21.4% to 26.0%26.0% to 100.0%

2005

Conference Theme-Subprime

But Vermont is expected to face a period where housing price change goes negative on a year-over-year basis…

Tracking Quarterly Housing Price Changes, 1996:1-2011:4 (OFHEO Index)

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Year:Quarter

An

nu

aliz

ed

Pe

rce

nt

Ch

an

ge

Conference Theme-Subprime

Vermont’s—like other NE states’—largest source of forecast risk through 2011 is how the subprime issue-housing market correction will play out…– The critical time for VT will be the period when housing prices go “negative”…

– May have a larger impact in VT because of the disproportionately large positive impact the housing market boom had on the VT economy (28.4% of total job growth 2003-06 v. 12.2% for NE and 16.5% for U.S. for the same 4 year period).

Given the dynamics of the housing market correction, it is difficult to envision a turnaround much before mid-calendar 2008.– Second homes impact in VT is a big “wild card.”– Anecdotal reports from resorts indicate replay of the mid-1990s dynamic is currently underway.